YUM report - Zacks Investment Research



PetSmart Inc. |

(PETM-NASDAQ)

|$82.93 | |

Note: More details to come; changes are highlighted. Except where highlighted, no other sections of this report have been updated.

Reason for Report: Flash Update: 4Q14 & FY14 Earnings Update.

Prev. Ed.: Sep 19, 2014, 2Q14 Earnings Update.

Flash Update (earnings update to follow)

On Mar 4, 2015, PetSmart reported fiscal 4Q14 adjusted earnings per share of $1.43 that came miles ahead of the Zacks Consensus Estimate of $1.37 and also increased 11.7% year over year. Earnings fared much better than the company’s own expectations of $1.34 to $1.38 as well.

Including one–time items, earnings were $1.32 per share, up 3.1% from the fiscal 4Q13.

Adjusted earnings per share for fiscal 2014 were $4.47, up 11.2% from fiscal 2013 and ahead of the Zacks Consensus Estimate of $4.42. Including one-time items, earnings were at $4.26 per share, up 6% from the prior fiscal.

Constant focus on customers and derived benefits from sustained pursuit of growth strategies were the main catalysts.

Net sales increased 6% to $1,913.8 million and were way ahead of the Zacks Consensus Estimate of $1,862 million. For the year, sales were up 2.8% to $7,111.9 million and easily surpassed the Zacks Consensus Estimate of $7,081 million.

For the quarter, PetSmart’s comparable-store sales (comps) were up 2.6% and within the company’s expectations. During the quarter, average ticket grew 2% with 0.6% rise in comparable transactions.

By categories, Merchandise sales inched up nearly 6% to $1,705.3 million, while sales from the Services segment were up 6.8% to $198.2 million. Other revenues in the quarter came in at nearly $10.3 million, up 4.2% year over year.

The company’s gross profit of $596.6 million grew 5.4% year over year. However, gross margin shriveled 20 basis points (bps) to 31.2%. Operating income grew 3% to $223 million but operating margin dropped 30 bps to 11.7%.

Other Developments

Under the multiyear profit improvement program, PetSmart achieved $6 million in savings in the quarter, taking the total savings for the fiscal to $8 million.

Further, the company stated that it is on track to achieve or even surpass the $200 million targeted annual cost savings by the end of fiscal 2016. The company had announced the multi-year profit improvement program in the fiscal 3Q14.

One-time charges, associated with the implementation of the plan, for the year totaled $24 million with $7.9 million incurred in the fiscal 4Q14. Total charges are estimated to be $30 million.

Further, PetSmart’s acquisition by a consortium led by BC Partners is likely to conclude in the fiscal 1Q15 subject to regularity, shareholder and customary approvals. The deal was announced on Dec 14, 2014.

Financials

The company ended the quarter with nearly $444.2 million in cash, cash equivalents, and no borrowings under its credit facility, while total shareholders’ equity stood at $1,370 million.

PetSmart’s cash flow from operations was $678.1 million and it incurred $141.4 million as capital expenditure. Additionally, reflecting its focus on boosting shareholder value, the company paid dividends worth $77.7 million during the reported quarter and repurchased shares worth $130 million.

MORE DETAILS WILL COME IN THE IMMIMENT EDITIONS OF ZACKS RD REPORTS ON PETM

Portfolio Manager Executive Summary [Note: only highlighted material has been changed]

PetSmart Inc. (PETM) is a leading specialty retailer of pet related products and services in North America. PetSmart stores carry a selection of pet supplies at everyday low prices. The company offers more than 13,400 items, including nationally recognized brand names, as well as a selection of private brands across a range of product categories. PetSmart complements its product assortment with value-added pet services, including grooming, training, boarding, and day camp.

Analysts’ Opinions: Almost 83.3% of the analysts in the Digest group covering the stock were neutral, 5.6% were positive and 11.1% were negative about it. Target prices provided by the analysts range from a low of $55.00 to a high of $75.00. The average is $65.27, implying a return of -6.3%.

The outlook of the firms on PetSmart is analyzed in the following paragraphs:

Neutral or equivalent (83.3%; 15/18 firms): These firms remain constructive on the fundamentals of the company. They believe that the company’s differentiated merchandise and services position it well to gain market share in the long run. In addition, management has laid down certain cost cutting initiatives to turnaround its performance going forward. Management intends to focus on increasing sale of consumables, expanding omni channel reach (acquisition of online retailer Pet360) and creating more brand awareness. Moreover, PetSmart’s shareholder-friendly strategies place it in a better position compared to its peers, reflecting the company’s ability to generate a healthy cash flow and its focus on boosting shareholders value.

However, these firms apprehend that lingering macroeconomic concerns and increasing competition from online retailers will weigh upon the company’s efforts. Moreover, as per these firms, the company’s exploration of strategic options in spite of laying out a performance turnaround plan and acquisitions is a distraction.

Positive or equivalent (5.6%; 1/18 firms): These firms have a bullish stance based on the company’s focus on sales, and a healthy financial position that could enable PetSmart to achieve solid long-term growth. Further, these firms regard PetSmart to be a leader in the pet space, which continues to occupy a dominant position over its peers.

These firms believe that store growth opportunities are plentiful in the long term. Further, PetSmart differentiates itself by means of a successful services program, PetsHotels, which provides a high barrier to entry. The company’s positive mix in the food category and differentiated product mix are expected to generate high sales and margins and drive traffic.

The firms believe that the company is focused on building its brand image and is continuously emphasizing on its merchandise assortments to drive higher sales.

Negative or Equivalent (11.1%; 2/18 firm): The company’s products are mostly discretionary in nature. Though economic recovery is picking up pace, it will take time for discretionary spending to rebound fully thereby subduing top line growth.

Sep 19, 2014

Overview [Note: only highlighted material has been changed]

Key investment considerations as identified by firms are as follows:

|Key Positive Argument |Key Negative Argument |

|The company is a leading retailer of pet supplies and services, nearly |PetSmart is facing a competitive backdrop with the grocer and discount |

|twice the size of its nearest competitor, in terms of overall sales and |channel as well as online giants increasing their presence in the pet |

|sales per square foot. |category. |

| | |

|The company has a state-of-the-art distribution system, and a strong |Sluggish macroeconomic environment remains a drag on discretionary spending. |

|management team. | |

Based in Phoenix, AZ, PetSmart Inc. (PETM) provides products, services, and solutions for the lifetime needs of pets in North America. As of Aug 3, 2014, the company operates more than 1,352 pet stores in the United States, Canada and Puerto Rico, and has full-service veterinary hospitals in 856 of the stores. It also offers pet services, including grooming, such as precision cuts, baths, toenail trimming, and tooth brushing; pet training; PetsHotel; and Doggie Day Camp. The company’s PetsHotel provides boarding for dogs and cats, 24-hour supervision, an on-call veterinarian, temperature controlled rooms and suites, daily specialty treats, and playtime, as well as day camp for dogs. PetSmart, through a strategic relationship with Banfield, also offers various veterinary care, including examinations and vaccinations, dental care, a pharmacy, and routine and complex surgical procedures. Through PetSmart Charities Inc., it creates and supports programs that help it find a lifelong home for every pet. PetSmart sells its products through its stores and direct marketing channels, including , an Internet pet e-Commerce site, and an e-Commerce site for equine products and two branded catalogs.

For more information visit PetSmart’s website: . PetSmart’s fiscal year ends on Feb 2.

Sep 19, 2014

Long-Term Growth [Note: only highlighted material has been changed]

Recently, PetSmart at its 2Q14 earnings conference call gave an outline of growth initiatives that the company is taking up to enhance its operations in the long-term. It is expected that the company will provide comprehensive details of these initiatives in the coming days.

PetSmart will be expanding its food assortment to become the ultimate destination for pet food. Moreover, the company is focusing on adequate marketing design to increase footfall. It is looking to bring together all famous brands along with its exclusive proprietary products under one roof.

Consequently, management will take up investment aggressively to build proper infrastructure to cater to the customers needs and enhance their shopping experiences. The company’s primary goal remains providing personalized customer experience.

To keep in sync with changing trends and retain market share amid rising online competition, management has stressed heavily on developing its omni channel reach. The company aims to build an unparalleled scale and distribution infrastructure to provide a total shopping experience to its customers.

Sep 19, 2014

Target Price / Valuation [Note: only highlighted material has been changed]

|Rating Distribution |

|Positive |5.6%↓ |

|Neutral |83.3%↓ |

|Negative |11.1%↑ |

|Avg. Target Price |$65.27↑ |

|Maximum Target |$75.00↑ |

|Minimum Target |$55.00↑ |

|No. of Analysts with Target Price/Total |11/18↓ |

Risks to the target price include execution risk, given the company’s accelerated pace of new store openings and the rollout of the PetsHotels concept. Further, the sales and comps volatility, discounts and promotions negatively affected gross margins, store openings/closings and investments, de-leveraging SG&A, consumer confidence and personal income growth, higher gasoline and energy costs, rising interest rates, adverse weather, geo-political risks, etc.

Recent Events [Note: only highlighted material has been changed]

On Aug 19, 2014, PetSmart posted 2Q14 quarterly earnings of $0.98 per share rose 10.1% year over year and came ahead of management’s prior projection of $0.94-$0.96. Moreover, earnings beat the Zacks Consensus Estimate of $0.94 on the back of its constant focus on customers and derived benefits from the sustained growth in the specialty network. Along with the earnings, PetSmart announced its agreement to buy online retailer Pet360 for $130 million.

Revenue [Note: only highlighted material has been changed]

According to the Zacks Digest model, net sales increased 1.4% y-o-y to $1,729.9 million in 2Q14. As per PetSmart, comps dipped 0.5% with a 2.6% slip in comparable transactions. Unfavorable impact from foreign currency fluctuations and prevalent sluggish industry trends contributed to negative comps.

By categories, Merchandise sales increased nearly 0.8% to $1,505 million while Services sales increased 4.6% to $214.2 million in 2Q14. Other revenues in the quarter came in at $10.8 million, up 21.9% year over year.

Provided below is a summary of revenue as compiled by Zacks Research Digest:

|Revenue($M) |2Q13A |

|Copy Editor: |Sumit Singh |

|Content Ed. |Sumit Singh |

|No. of brokers reported/Total brokers|N/A |

|Reason for Update |Flash |

|QCA |Sumit Singh |

|Lead Analyst |Sumit Singh |

| | |

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March 4, 2015

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